Bonus deduction under income tax law upheld where settlement payment stayed within the statutory ceiling and was bona fide.

Bonus paid at 20% of wages was treated as deductible under section 36(1)(ii) where it was made under a bona fide settlement with employees and its genuineness and reasonableness were not disputed. The Payment of Bonus Act, 1965 was read as permitting bonus up to the statutory ceiling, and the word "payable" in the first proviso was construed as "permitted to pay" rather than "legally obliged to pay". On that interpretation, the excess over 8.33% remained within the allowable limit; alternatively, the payment also met the second proviso because it arose from an agreed settlement.

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Issues: Whether bonus paid at 20% of wages, in excess of 8.33%, was allowable as deduction under section 36(1)(ii) of the Income-tax Act, 1961, having regard to the Payment of Bonus Act, 1965.

Analysis: The payment of bonus was made pursuant to an agreement between the employers' association and the employees' union through the conciliation machinery, and its genuineness and reasonableness were not in dispute. Section 11 of the Payment of Bonus Act, 1965 permits payment of bonus up to 20% and the word "payable" in the first proviso to section 36(1)(ii) was construed as "permitted to pay" rather than "legally obliged to pay". On that interpretation, bonus paid at 20% remained within the statutory limit. In the alternative, if the excess over 8.33% was treated as not payable under the Bonus Act, the payment satisfied the conditions of the second proviso because it was made under an agreed settlement with employees.

Conclusion: The excess bonus was allowable as deduction and the disallowance was rightly deleted.

Ratio Decidendi: Bonus paid in accordance with a bona fide settlement and within the maximum ceiling permitted by the Payment of Bonus Act, 1965 is deductible under section 36(1)(ii) of the Income-tax Act, 1961; the expression "payable" in the proviso is to be read as "permitted to pay".

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